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Sunday, November 15, 2015

Book Review: Why Minsky Matters (Wray)

L. Randall Wray, one of economist Hyman Minsky's students, and one of academics behind the development of Modern Monetary Theory (MMT) provides us with an introduction to Minsky's thought in "Why Minsky Matters: An Introduction to the Work of a Maverick Economist." As the title suggests, it is not an attempt to explain the details of the evolution of Minsky's theories over his career, rather it is an attempt to relate his theory to contemporary events. The book is aimed at those who are unfamiliar with his work, and "post-Keynesian" economics in general. (I am using "post-Keynesian" here as a wide term; Minsky would probably not fit within a narrower definition of "post-Keynesian".)

Book Description

The book was recently published (the copyright page follows publishing industry practice and lists 2016 as the publication date) by Princeton University Press. The author is now a professor of economics at Bard College, and is associated with the formation of the "Modern Monetary Theory" wing of post-Keynesian economics. As noted earlier, he was a student of Minsky's, and the book gives us insights into Minsky's thinking that go beyond his published works.

The book is largely jargon-free, which is unlike Minsky's writings. Minsky had considerable contact with those in the finance industry, and he imported some trading slang into his writings. The book is 288 pages, and it relegates references to end notes.

The chapters of the book include (excluding the introduction, and end matter):

  1. Overview of Minsky's Main Contributions?
  2. Where Did We Go Wrong? Macroeconomics and the Road Not Taken
  3. Minsky's Early Contributions: The Financial Instability Hypothesis
  4. Minsky's Views On Money and Banking
  5. Minsky's Approach to Poverty and Unemployment
  6. Minsky and the Global Financial Crisis
  7. Minsky and Financial Reforms
  8. Conclusion: Reforms to Promote Stability, Democracy, Security, and Inequality
The book has a limited amount of biographical information, but this aspect was not heavily emphasised. To briefly summarise, Minsky's university studies interrupted by World War II, but he returned to have a multi-decade academic career. In his retirement, he was associated with the Levy Institute until his death in 1996.

More Than Just Financial Instability

Minsky's most well known and distinctive insights revolve around his analysis of the instability of capitalist economies. "Stability is destabilising" is the best summary. The mechanism behind this destabilisation is straightforward: as risk taking is rewarded in a stable business environment, there is a form of "natural selection" within the business sector, and businesses drift towards riskier and riskier behaviour.

This view is in stark contrast to the mainstream view that assumes that the economy will return to "equilibrium" as soon as external "shocks" fade away. Given the various waves of craziness that have swept through the financial markets over the past decades, which have then infected the "real economy," I find Minsky's view of instability a common sense proposition.

However, financial and economic instability was not the only concern of Minsky, he also spent considerable time analysing other reforms, particularly to the labour market. Wray lists three other areas of his contributions: the "employer of last resort" proposal (adopted as a "Job Guarantee" within MMT), his analysis of money and banking, and the long-term evolution of the structure of the economy. I would note that I am not a historian of economic thought, but it is my impression that his contributions in those other areas may be less distinctive when compared to his contemporaries (whose work I am not familiar with), but they are extremely interesting.

One of the difficulties with approaching Minsky is that his thought is not easily compartmentalised into the simplistic "free market" versus "socialist" framework that is now commonly assumed. Wray notes the apparent contradictions of a "radical" economist who echoed Ronald Reagan's criticism of the welfare state. For example, the big idea at the moment amongst the establishment "Keynesians" (such as Krugman, DeLong, and Summers) is that the United States should ramp up infrastructure spending -- exactly the policy description of the Democrats of the 1960s (and which failed, for reasons Minsky diagnosed at the time).

For reasons of space, I will not attempt to discuss these various areas of contributions within this review. I may take up some points in later articles, but I would also refer the reader to an earlier book review, where I discussed some of the details of Minsky's analysis of the labour market. (Link -- Book Review: Ending Poverty: Jobs Not Welfare.)

Who Should Buy This Book?

I like this book, and see it as worthwhile for most readers who are interested in macroeconomics. However, it must be kept in mind that it is introductory. For someone who has read a cross section of Minsky's work, this book will not contain a whole lot of new theoretical insights. However, it is a readable introduction for those with less knowledge of the subject.

For those with a grasp of how the credit markets work, it is unclear that Minsky's writings are as hard to follow as Wray hints within this book. The advantage of reading some of Minsky's writings (such as Stabilising an Unstable Economy) directly, and not relying on Wray's summary is that Minsky often related his views to the various financial crises of the 1970s and 1980s. It is only by looking at the details of those crises that we see that financial market behaviour in 2007 was not a radical departure from earlier decades; the only difference was the amplification of the behaviour.

Too Focussed On Current Concerns?

The objective of the book is to explain how Minsky's thoughts are relevant to current concerns. Since I routinely refer to Minsky's writings here, I obviously agree that Minsky's work is extremely useful for understanding current events.

It is therefore unsurprising that Wray relates Minsky's thought to the Financial Crisis (which was branded the "Minsky Moment"). Although reasonable, there was a considerable amount of space discussing what Minsky would have thought about various developments both immediately before, during, and after the crisis. I feel that this was somewhat too speculative, as I could imagine a "Minsky-an" view of the financial crisis which does not conform to Wray's outline. That is, although I assume that Minsky would have viewed the developments leading up to the crisis as being a tragic policy error, it is unclear to me which policy error(s) he would diagnose as being the culprit(s).

Wray also has an extended discussion of the argument Paul Krugman had with Steve Keen about the role of banks -- in 2012. This argument, for those who are unaware of it, caused a huge kerfuffle on the economic blogosphere, and it revolved around whether banks created money "out of thin air." If we look at just what Krugman wrote in the article in question, he was obviously wrong. However, I have seen arguments that what Krugman really meant involved a more complex analysis of the relationship between the banking system and the economy; he just mangled his explanation. Although I believe that this complex analysis is also incorrect, the arguments are quite esoteric, and not obviously wrong. Since this particular argument cropped up well after Minsky died, it is unclear why it needed to be raised within the book.

On the other hand, it would have been nice to have more coverage of Minsky's thoughts about the inflation process. Admittedly, inflation is not a particular concern in 2015, but it was a concern for a good portion of Minsky's career.

Concluding Remarks

This book would be very helpful for someone who is interested in understanding Minsky's analytical framework. However, the focus of the book is relating Minsky's mode of thought to the current situation, and is less of an attempt to understand the issues of Minsky's day.

Finally, the book is available at (affiliate link).

(c) Brian Romanchuk 2015

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